EU finmins near deal on tougher budget rules

LUXEMBOURG (Reuters) - European Union finance ministers agreed on Monday that sanctions for breaching EU deficit and debt limits should be almost automatic, but were still discussing how fast they should kick in, EU sources said.

Poland's Finance Minister Jacek Rostowski speaks at the Parliament in Warsaw July 14, 2009. Poland's 2010 budget gap should not be higher than the 27 billion zlotys ($8.6 billion) planned for this year, Rostowski said on Tuesday. REUTERS/Peter Andrews

EU finance ministers are in talks in Luxembourg to complete an overhaul of EU budget rules, the Stability and Growth Pact, and agree on a report for EU leaders on how to make the rules tougher, to prevent a new sovereign debt crisis.

“There is an agreement on ... a significantly strengthened preventive action and a significantly strengthened system of imposing sanctions,” Polish Finance Minister Jacek Rostowski told reporters on leaving the meeting.

“We are going in the right direction. There is also a high degree of agreement on the permanent system of crisis resolution. We can be satisfied with progress made.”

The changes to the Stability and Growth Pact are the biggest overhaul of the fiscal rules underpinning the euro since its creation in 1999.

One of the thorny issues was how much ministerial discretion would apply in deciding sanctions, which would take the form of interest-bearing and non-interest bearing deposits and fines.

Sources close to the talks said that despite the opposition of a group of countries led by France, the ministers backed a proposal of the EU executive arm, the European Commission, that only a qualified majority of ministers could stop such sanctions -- or what the Commission calls reverse majority voting.

The name comes from the fact that until now, only a qualified majority could impose sanctions.

“There is agreement on the reverse majority voting,” one EU source with insight into the talks said.

Sanctions would be imposed if a country ignores a warning issued by the Commission and does not change the policies that put it in breach of EU budget rules -- such as failing to reduce its budget deficit or debt quickly enough.

But EU countries could not yet reach a deal on how much time a country warned by the Commission should be given to mend its ways. Proposals varied from five months to 18 months, sources said.

There was also agreement that euro zone countries which have serious macroeconomic imbalances could be fined, but no amounts of fines or other sanctions were likely to be decided on Monday, sources said. Such details would be left for further work after an EU leaders’ summit next week.

This also included the amount by which euro zone countries should reduce their debt each year to avoid being put into a disciplinary budget procedure, which would involve sanctions.

On entering the meeting, the last before the ministers are due to submit their report to EU leaders, Economic and Monetary Affairs Commissioner Olli Rehn urged member states to agree on tough reforms as enthusiasm for far-reaching change was waning.

The resolve to toughen fiscal rules may be fading in some countries because any immediate danger of a full-blown sovereign debt crisis is widely thought to have passed, despite the problems suffered by Greece this year.

“A lot of member states are getting cold feet now, but during the crisis this spring, we saw what the sovereign debt crisis can do,” said Dutch Finance Minister Jan Kees de Jager.

The executive European Commission presented last month a set of proposals to impose sanctions on euro zone countries breaking the EU fiscal rulebook much earlier and with less ministerial discretion.

EU rules say that countries must not run budget deficits higher than 3 percent of GDP or have debt above 60 percent of GDP. However, the global economic crisis has made most members of the 27-nation bloc go well above either, or both limits.

The ministers are also discussing how much to commit themselves to creating a permanent mechanism for crisis resolution in the euro zone in the future.

The 16-country area has so far only agreed on ad-hoc solutions for emergency financing -- an 80 billion euro (70 billion pound) bilateral loan package for Greece and a 500 billion euro European Financial Stability Mechanism for all euro zone states.

A draft report prepared for the ministers last week, obtained by Reuters, showed that one option was that a permanent crisis resolution mechanism would involve strong conditions set for any aid to be given, with terms and conditions similar to those imposed by the International Monetary Fund.

It would also involve the private sector and the IMF, address the issue of moral hazard, and strengthen incentives to pursue sound fiscal policy as well as respect the independence of the European Central Bank.

(Additional reporting by Ilona Wissenbach)

Reporting by Jan Strupczewski, editing by Rex Merrifield